Reacting to the Fed’s Expectations is a Clown Show

All kinds of yelling and screaming after the Fed told us they’re thinking three rate hikes in 2017. The dollar ramped, stocks folded up their three-card monte table and hustled into the alley, Treasury yields too off above 2.60%.

Is the hysteria warranted?

Here’s a helpful reminder about the Fed’s stated expectations and the reality, via Convergex Chief Strategist Nick Colas:

But was this market reaction warranted, given the Fed’s track record at calling future interest rates (spoiler alert: no)?  Here are a few points to consider.

  • Back in June 2016, the Fed’s Economic Projections put the appropriate level of Fed Funds for December 2017 at 1.6%, and 0.9% for this year.

  • It then cut those estimates at the September meeting to 0.6% for this year (where today’s meeting took us) and 1.1% for 2017.

  • Today, the Fed essentially split the difference, raising its 2017 Fed Funds outlook to 1.4%.The actual number is 1.37%.  This average of 1.1% (September’s estimate) and 1.6% (the June guess) is 1.35%.

  • Put another way, the Federal Reserve has actually not changed its basis perspective on the trajectory for interest rates through 2017 in the back half of 2016. A little nip here, a tiny tuck there…  But today’s change was far from a radical redo of its expectations.

Josh here. The Fed expected it would hike four times in 2016 one year ago but it only hiked once, at the very last moment.

The Fed says that it is data-dependent and the data changes throughout the year. As such, its forecasts about what it may or may not do over the next 12 months have all the permanence of a sand castle sitting at the edge of the tide. In addition, the Fed also reacts to geopolitical developments that produce “uncertainty.” Recall its hemming and hawing at the June meeting and specific referencing of the Brexit referendum.

Building a narrative around something this malleable and infirm is a surefire way to become the star of the clown show.


Convergex – December 14th 2016

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